Wall Street Journal April 21, 2003 Russian Oil Firms Hold Talks In Deal to Form Energy Titan Yukos-Sibneft Merger Would Form World's Sixth Largest Oil Producer By JEANNE WHALEN Staff Reporter of THE WALL STREET JOURNAL
MOSCOW -- Two Russian oil companies are in talks to merge and form an energy concern that would rank sixth by production among the world's publicly traded petroleum and gas concerns, according to people familiar with the negotiations.
These people say the merger could be announced early this week.
OAO Yukos and OAO Sibneft, two fast-growing Siberian producers, are close to signing an agreement to combine their assets into a company that would pump 2.2 million barrels of oil a day, just shy of the output of fifth-ranking TotalFinaElf SA. The business would hold 20.7 billion barrels of petroleum and natural-gas reserves and have a market capitalization of about $35 billion.
If completed, the deal would mark the largest merger in Russia's fledgling market economy and create a new international heavyweight capable of financing big development projects in Russia and beyond, analysts said. The transaction would follow hard on the heels of BP PLC's $6.75 billion investment in Russian oil, which was announced in February.
People familiar with the discussions say Yukos's current shareholders would own a majority stake in the combined entity, with Sibneft shareholders retaining a smaller stake in the range of 25%. Both producers are majority owned by a small circle of Russian businessmen, who bought the assets at rock-bottom prices from the state in the mid-1990s. Foreign portfolio investors own minority stakes in both firms.
Officials from Sibneft and Yukos declined to comment on the negotiations.
Russia's petroleum production collapsed after the fall of the Soviet Union but has begun soaring in recent years as the newly private sector boosts investment. Already the world's second-biggest oil exporter after Saudi Arabia, Russia plans to build several new pipelines in coming years to help it grab more market share from the Organization of Petroleum Exporting Countries. Washington has welcomed the growth, hoping that Russia can help ease the West's reliance on Middle Eastern crude.
The oil merger would signal a maturing of the Russian economy and a rare sign of cooperation among the fiercely competitive tycoons who control much of that nation's industry. Mikhail Khodorkovsky and Roman Abramovich, the biggest single shareholders in Yukos and Sibneft, respectively, came close to combining their firms in 1998 but stopped short of signing a deal. Analysts at the time said Sibneft wanted a bigger stake than Yukos was willing to cede.
People familiar with the current talks say the transaction would involve Yukos's making a cash payment to Sibneft. They add that Yukos approached Western commercial banks last week seeking acquisition financing of as much as $1.3 billion to complete the deal. Yukos produces 1.6 million barrels of petroleum a day, while Sibneft pumps 600,000 barrels daily.
Mr. Khodorkovsky, chief executive of Yukos, would run the new entity, according to people familiar with the matter. The politically powerful oil chief worked his way up through the chaos of early Russian capitalism by starting a bank, Menatep, which eventually failed in the 1998 financial crash. After helping finance Boris Yeltsin's re-election campaign in 1996, he bought Yukos from the state and presided over several years of stagnant oil output at the company.
But as political stability has taken root under President Vladimir Putin, Mr. Khodorkovsky and other businesspeople boosted investment and begun adopting Western management and technology. Yukos's oil production and market capitalization have soared as a result, making Mr. Khodorkovsky Russia's richest man, with a net worth of about $7 billion.
The Yukos chief often has voiced ambitions to vault his company into the top tier of world energy firms, and the merger talks appear aimed at that goal. One person familiar with the discussions said the oil chiefs approached the Kremlin last week to get its blessing for the merger. Russian petroleum shares have been rising in recent weeks amid rumors of a coming transaction, with some analysts speculating that a major foreign oil company planned to buy part of Sibneft.
Both Yukos and Sibneft have enjoyed double-digit petroleum output growth in recent years, but they face steep future investments to keep production growing and to get their oil to market. The firms have announced plans, along with other Russian partners, to build multibillion-dollar pipelines that would carry crude south to China and north to a new Arctic port.
The $4.5 billion Arctic project, which could eventually send large quantities of oil to the U.S., got a boost last week when Moscow endorsed it.
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